Flue-cured outlook

Some tobacco quota increase likely While a 600-million-pound flue-cured tobacco quota for 2001 might seem overly optimistic, it's not impossible, and some increase seems likely, says Blake Brown, North Carolina State University Extension economist.

The 2000 flue-cured tobacco crop in the United States was best characterized by drought and the resulting poor quality in Georgia and by good growing conditions and good quality and quantity in the remainder of the flue-cured areas, says Brown.

Overall receipts of eight to 10 percent were anticipated for the Flue-Cured Stabilization Cooperative Corporation, he adds. This is in contrast to 1999 stabilization receipts of 21 percent. Lower stabilization receipts in 2000 are due primarily to a smaller quota that more closely fits domestic and export demand, says Brown.

U.S. cigarette manufacturers, he says, have successfully reduced inventories of flue-cured tobacco by buying less tobacco than they use.

"While tobacco use by manufacturers likely will decline slightly further, inventory reduction likely will slow so that purchases may begin rebounding towards actual use levels in 2001. This implies that purchase intentions, as announced by U.S. cigarette manufacturers, for the 2001 quota formula have the potential to increase from the record-low level of 286 million pounds for the 2000 quota," notes Brown.

Heavy competition Flue-cured tobacco from Brazil and Zimbabwe is the primary competition to U.S. flue-cured tobacco in the world market, says the economist. Brazil again produced a large flue-cured crop of above-average quality.

"While the Brazilian currency has stabilized, Brazilian tobacco remains extremely competitively priced on the world market. Brazil's 2000 flue-cured tobacco crop is estimated at 947 million pounds - 400 million pounds more than the U.S. crop."

Flue-cured production in Zimbabwe is likely to decline in the future due to tremendous civil and economic strife, says Brown. Despite the turmoil, however, Zimbabwe has produced about 485 million pounds in 2000. If Zimbabwe's tobacco production declines after 2000, other flue-cured-producing countries will capture that share of the world market, he says.

"Under the current U.S. tobacco program, U.S. producers are not in a position to take advantage of this available market share. Brazil likely will be the primary beneficiary. However, anticipated declines in Zimbabwean tobacco production and a weather-related short crop in China may bolster U.S. flue-cured exports from their current depressed levels."

The opening of the Chinese market to the import of U.S. tobacco also may bolster U.S. exports, says Brown. China agreed to allow importation of U.S. tobacco beginning Dec. 1, 2000. Previously, China had banned all imports of U.S. tobacco, supposedly due to concerns over blue mold disease.

China grows more than six times the quantity of tobacco produced in the United States, he says. However, most of it is consumed in China and is mostly low-quality tobacco. Chinese manufacturers reportedly want high-quality U.S. flue-cured tobacco for a growing premium cigarette market, notes Brown.

Quota recovery "While forecasting the quantity of tobacco that China might purchase is difficult, China may purchase some of the current stabilization inventory, thus increasing the possibility of a recovery of the national flue-cured quota. China also could become a regular customer for U.S. flue-cured in the future."

As a result of these factors, domestic purchase intentions could increase and stabilization inventories could decrease for 2001, says Brown. These events would lead to either the stabilization or an increase in the 2001 quota, he adds.

At the same time the settlement between the states and cigarette manufacturers was negotiated, a separate agreement was reached that set aside $5.2 billion from manufacturers to be paid to tobacco growers and quota owners over 12 years. These funds are commonly known as Phase II funds, and each tobacco-producing state was to receive a portion of the funds based on their share of national tobacco production.

In the five flue-cured tobacco-producing states - North Carolina, Virginia, South Carolina, Georgia and Florida - the Phase II commissions split the 1999 payment 50-50 between growers and quota owners. Most growers and quota owners began receiving their first payments in January of this year.

Most states, says Brown, already have decided how the 2000 payments will be made. In most cases, they will be similar to the basis for the 1999 payments. Payments should be sent out in late 2000.

In 1999, Congress allocated $328 million to assist tobacco growers and quota owners due to loss of quota. The money was distributed to growers and quota owners in the spring of 2000 in the same manner as Phase II funds for each state.

For 2000, Congress has allocated $340 million as quota loss payments. This money also will be paid based on quota loss and should be received this fall.

"The allocation of funds for tobacco farmers by Congress was a surprise to many in the tobacco industry. Most farm lenders feel that the continuation of such funding isn't likely," says Brown.

Quota rebound seen Given the reduction in world supplies, the potential decline in Zimbabwean flue-cured tobacco production, possible purchases of U.S. tobacco by China and the reduction of flue-cured tobacco inventories, the national flue-cured quota could rebound in 2001, contends Brown.

"Under the current tobacco program, a national flue-cured quota of at least 600 million pounds may be achievable and sustainable over the next few years. The national flue-cured tobacco quota averaged about 875 million pounds in the mid-1990s. However, the burley tobacco national quota is at levels of one-third the levels from just two years ago, and further declines are expected."

Small quotas have increased quota rental rates, he continues, and likely will lead to the exit of farmers over the next year. "This exit will come primarily from older and smaller farmers who find they can make as much or more income by renting their quota to younger or larger farmers.

"The extremely small quotas could lead farmers to demand changes to the tobacco program. The direction of change is difficult to predict, but successful efforts to increase quotas probably would involve reductions in price support."

External threats to the tobacco program from anti-tobacco forces now seem minimal, says Brown. In fact, he says, many health advocacy groups now support continuation of a tobacco program because it restricts production and maintains a relatively high tobacco price to cigarette manufacturers.

"Any change in the tobacco program likely will come from internal pressures. A decline in Zimbabwean flue-cured production could provide an opportunity for U.S. flue-cured farmers to increase their share in the world market. However, U.S. market share isn't likely to increase significantly without changes in the tobacco program. While tobacco is not part of the 2002 farm bill, the farm bill could provide a vehicle for change in the tobacco program."

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